The “Magnificent Seven” Are the New Meme Stocks

When you’re in a bubble, you can’t see the bubble. Hence, it’s hard to know if technology stocks are actually in a bubble in 2023. However, if valuation means anything anymore, we can at least call it an “imbalance” if we’re reluctant to apply the “b”-word.

The imbalance I’m referring to is the lack of broad participation in this year’s relentless stock market rally. It’s unusual for the NASDAQ to be up by more than one-third when the year is only halfway over. Meanwhile, non-technology stocks are only up moderately year-to-date.

This isn’t to suggest that all tech stocks are flying high. Mostly, it’s been a case of the big getting bigger and the rich getting richer, with NVIDIA leading a handful of soaring stocks to fresh highs practically every week lately.

That’s why the year-so-far gains in the S&P 500 are misleading. Yes, there are 500 stocks in the index, but most of them have little weighting and therefore little impact on the S&P 500’s performance. Meanwhile, a small number of stocks have a heavy weighting, and they’re getting even heavier as their market caps continue to grow.

A few years ago, NVIDIA wasn’t the toast of the town and the market was ruled by what Jim Cramer called “FAANG” stocks. Today, Netflix isn’t red-hot like it once was and there’s been some reshuffling, so “FAANG” has effectively been superseded by the “Magnificent Seven.”

What are the “Magnificent Seven” stocks? They are Microsoft (MSFT), Apple (AAPL), NVIDIA (NVDA), Tesla (TSLA), Google parent Alphabet (GOOGL), Meta Platforms (META) and Amazon.com (AMZN). Together, they account for more than 50% of the weighting of the NASDAQ 100 index.

Courtesy: Yahoo Finance

The result of the market favoring a few famous tech names is that value plays have largely been abandoned. Classic equities-market stand-bys with low P/E ratios, like Verizon (VZ) and Ford (F), have become pariahs in 2023.

Meanwhile, you’ll see headlines in the financial press trumpeting the virtues the “Magnificent Seven.” Examples include: “Nvidia’s stock could have a pathway to $600, Citi says”; “Meta is still at the ‘early stages’ of many catalysts, analyst says”; and “Apple has a juicy $40 billion opportunity ahead of it.”

And of course, we’ve got Treasury Secretary Janet Yellen declaring, “I don’t expect a recession,” and, “I think we’re on a good path.” I sincerely hope that no one is actually predicating their investment decisions on the Treasury Secretary’s assessment of the economy.

If you were investing or trading during the dot-com bubble of 1999 and early 2000, you should recall what this type of euphoria feels like. The main difference is that you can replace “internet” with “AI” as the phrase that pays in 2023.

Granted, the internet did end up having a pervasive and enduring impact on the U.S. economy. AI might have a similar effect and revenue-generating potential, though it feels like the next five years’ worth of profits have already been baked into asset prices.

Courtesy: Yahoo Finance

That’s how we can end up with jaw-dropping valuations simply being accepted as normal in today’s market environment. The table shown above lists the vital stats of NVIDIA: a P/E ratio of 243, barely any dividend at all, and apparently everyone’s fine with that.

Well, not everyone. If you’re willing to do some digging, you can find voices of dissent that aren’t super-enthused about the “Magnificent Seven” and the economy in general. Those voices are effectively being drowned out by the throngs of manic buyers and promoters, however.

I’m not calling a market top here, as the dot-com bubble taught me an important lesson: valuations can get stretched for a surprisingly long time before they come back down to earth. Until then, I’m happy to sit on the sidelines, watch the cavalcade of bullish calls, and find my own “magnificent” stocks to buy.